Air Quality Uncertainty and Earnings Management

Abstract

We empirically examine the influence of rising political costs from the air quality uncertainty caused by regional air quality fluctuations on firms′ earnings management. The results indicate that when air quality uncertainty increases, firms tend to increase their degree of earnings management and are more willing to carry out downward earnings management. We also find that the relationship is more obvious in the bottom-ten cities according to air quality ranking. Further evidence shows that the effect is most pronounced for less market-oriented regions, northern regions, manufacturing industries and firms with high asset-liability ratio and high media attention. In addition, we find that air quality uncertainty affects earnings management through the intermediary effect of government environmental investment. We explore the influence of the external environmental uncertainty on earnings management decisions, and the results have significant reference value for improving firms’ earnings quality level.

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